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Costless Information and Costly Verification: A Case for Transparency

Author

Listed:
  • Deniz Kattwinkel
  • Jan Knoepfle

Abstract

A principal has to take a binary decision. She relies on information privately held by a completely biased agent. The principal cannot incentivize with transfers but can learn the agent's information at a cost. Additionally, the principal privately observes a signal correlated with the agent's type. Transparent mechanisms are optimal: unlike in standard results with correlation, the principal's payoff is the same as if her signal was public. They take a simple cut-off form: favorable signals ensure the agent's preferred action. Signals below this cut-off lead to the nonpreferred action unless the agent appeals. An appeal always triggers type verification.

Suggested Citation

  • Deniz Kattwinkel & Jan Knoepfle, 2019. "Costless Information and Costly Verification: A Case for Transparency," CRC TR 224 Discussion Paper Series crctr224_2019_114, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2019_114
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp114
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    More about this item

    Keywords

    Mechanism Design without Transfers; Costly Verification; Robust Mechanism Design; Transparency;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General

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